How will my Short Sale affect my Credit Rating?
A Short Sale is generally noted on credit reports as “settled for less than originally owed” which is more forgiving than a foreclosure. Seller should expect to receive a 1099 at the end of the year for the amount forgiven (Taxable Income)-the same as with a Foreclosure. YOU MUST CONSULT YOUR CPA BEFORE MAKING THIS DECISION. Every Seller is different. Many Sellers can offset income with their losses. Primary Residences are protected under the 2007 Debt Forgiveness Act by filing Form 982. See www.irs.gov for more detailed information. Homeowners that have gone through a Short Sale may be able to qualify for a new loan after 24 months, with a Foreclosure it’s 7 years!
*Purchase Money Loans used to purchase your property in Calif., are now protected against deficiency pursuit by Lenders (SB931).
As of Jan 1, 2011, your primary or vacation or investment property that was purchased with PML’S (a purchase money loan), is non-recourse and there is no recourse for the Lenders except to take back the property. They can no longer pursue you for deficiencies, but they can still tax you for the difference in loan balance and sale price* If your 2nd is a HELOC, (Home Equity Line of Credit), your Lender absolutely CAN come after you for deficiencies IF your Short Sale Realtor doesn’t do their job, and negotiate to have that right removed in your approval letter.
What if I have a Second Loan on my property?
Well, if you’re lucky enough to live in California, as of July 15, 2011, that Purchase Money Loan is also protected from deficiency pursuit by your Lender IF they agree to the Short Sale. How sweet is that? If your Second is a HELOC, (Home Equity Line of Credit), it is NOT covered by this protection because that is considered a personal lien. However..I have had great success in negotiating DOWN that amount, so it’s still worth while to Short Sale your home. Just expect to have to contribute something to get that HELOC settled.
Why should I Short Sale my property instead of letting it go to Foreclosure?
The best answer I can give you is that it gives you some control over the process. There’s the smaller ding on your credit, but really it comes down to control. Primary, secondary, vacation home..Purchase Money, refinance, HELOC…why NOT try to Short Sale if your CPA agrees that it would work for your situation? Once you miss a payment, you are headed to Foreclosure anyway, so why not try to negotiate with your Lender (Lenders), come to payoff agreement, and get it SETTLED! The second reason is that with a Short Sale, your credit damage lasts for approx. 24 months as opposed to 7 years with a Foreclosure. That’s HUGE in terms of a future loan. In 2016, we now have had enough time to see how the Lenders will treat a Short Sale VS. a Foreclosure when it comes to obtaining a new loan. It is true that after 24 months, you can often get approved for an FHA loan. Remember that you must keep your other credit cards and obligations current and in good standing.
What documents do I need to Supply…and when?
Ask your Lender if they want any short sale documentation submitted prior to an offer, or do they want the entire package when the offer is submitted. Each Lender is different. But, the commonality amongst them, is that you will need to submit an Agent Authorization letter, a Hardship letter, Monthly expense account, 2013 and 2014 Tax Returns, (and soon your 2015 tax returns.) Social Security payouts, Disability, alimony, annuities (any form of income), or most recent 2 months pay stubs, and most recent 2 months of bank statements.
Will I have to come up with any money?
The Lenders pay the commission, but EVERYTHING else is negotiable. However, as of July 15, 2011, in the new law protecting deficiency pursuit on your Second Notes, in California, if your Lenders agree to a Short Sale, they can no longer ask the Seller for money or a promissory note in addition to the Short Sale amount. Back HOA’s, IRS liens, HELOC’s are still negotiable and will require SOMEONE to come up with money. Primary Residences with one Purchase Money loan, and secondary residences with only one loan are a bit easier to negotiate. The seconds can be tricky because they want SOMETHING to release the lien. The first and often the Buyers can negotiate something towards the second..in California, the second is wiped out if it goes to Foreclosure, so it behooves them to work with us.
What does my Listing Agent Do?
Pretty much everything the Lender asks for. Buyers Agents just need weekly updates, but it’s the List Agent that gathers all documents, puts them together in the specific Lender requested Format, submits and then begins the weekly follow-up grind, with updates to all parties. This is why it is ESSENTIAL that your List Agent is experienced in Short Sales!
What’s the FIRST and most important steps for me to do to List my property? Make an appt. with your CPA or Tax Attorney.
Then contact a Certified Short Sale Agent to work with. Then, call your Lender and tell them you are doing a Short Sale, and will they please send you a Seller’s Short Sale Pkg? Request in writing who your Investors are, and is there any Mortgage Insurance? Then decide on a List Agent and fax your Lender your Agent Authorization Letter. Start gathering your Financials and keep everything updated and in one easy to access folder. GIVE YOUR AGENT EVERY SINGLE DOC SHE ASKS FOR. The quicker the Lender gets your docs, the higher your odds are for an approval.
What does HAFA mean?
This is the Government backed Short Sale program that was instituted in April of 2009 and expired in December of 2012, but has been extended in California. HAFA short sales are organized, and it will definitely cut down on the time frames for Short Sales because there is a mandatory timeline involved. There are requirements..this link will help you understand what they are..
How Long Does It Take?
A quick turnaround would be 90-120 days from List to Close of Escrow. That is quick! It all depends on how many payments late you are. What development your home is in because if there are lots of other Short Sales to use for Comps, it’s easier to set a FMV, (fair market value), price for your property as a new Short Sale Listing. You will avoid a foreclosure and the credit damage that goes along with it.
What if I have a Trustee Date set?
I have had success in listing and closing Short Sales with Sale Dates set as close as two weeks out. It can be done!
What if the IRS has attached a lien to my property?
Again, I have had experience with this situation. There is protocol. Your IRS lien does NOT go away, it is simply removed from this property to get the Short Sale done.
A foreclosure sale can be postponed once the process of a Short Sale is started, giving you more time in your home without paying your mortgage payments. This process can take anywhere from 2 to 6 months, allowing you time to make other living arrangements.
What does a Short Sale Surprise look like?
Short Sales are notorious for NOT knowing what to expect. It can be moving along, your offer is countered, the negotiator seems on top of things, your List Agent keeps you in the loop, and BAM! What happened? Your negotiator calls to say the Investors decided to turn down the offer, or your Buyer gets sick of waiting and walks even after you’ve got your approval letters. It’s just the way it is..roll with it.
Why would my bank approve a Short Sale?
The foreclosure process is very costly to a bank. By approving a Short Sale, the bank can avoid a substantial amount of expenses associated with the foreclosure process i.e. attorney fees, property damage, costs associated with re-selling the home, property taxes, insurance, delinquent HOA dues, Pool and landscape damage, interior home damage, etc. In a Short Sale scenario, the lender can cut its losses by liquidating the property faster. The Seller in a Short Sale must continue to keep the HOA’s current, utilities on, pool/landscape minimally kept up. The home does not beome a blight.
How does a Short Sale work?
Once you list with me, I market your property to find you a buyer and at the same time, negotiate, track your file with your lender on an almost daily basis. I will coordinate all of the details for you for a successful closing.
Are there any costs to me?
NO, a Short Sale is FREE, and there is no cost to you. The bank pays all associated fees in a Short Sale. Remember however, that the Lenders can counter our submitted offer. Be honest with me going in and we’ll know what we’re up against.
What About the Tax Consequences?
Every Short Sale is different based on the Lender involved, the status of the property, the Servicer, the Investor, your own financials. Tell your CPA or Tax Attorney that you are doing a Short Sale. Find out before your meeting approximately what the Fair Market Value is for your property, and they’ll be able to give you a realistic rundown of your personal tax consequences. For Primary Residences in California, the Mortgage Debt Forgiveness Act usually protects you from tax consequences. It is good through December 2016. However, there are things like refinancing, or pulling money out of the home (Home Equity Line of Credit) that can affect your taxes. Normally, your tax advisor will fill out Form 982 and you’re done. For some great information, go to www.irs.gov and read about the different tax forgiveness possibilities.
I am not an Attorney. Please consult your CPA, Attorney or Financial Advisor for any potential tax consequences.